Inflation stays hot topic in Europe and U.K. in the week ahead

Think people might take time off at Easter from worrying about inflation? Try again — Europe\’s favorite drama is as hot a topic as ever.

Mario Draghi reignited that chatter on Saturday, talking about how to tackle the low-inflation monster in Washington. The European Central Bank president ratched up his warnings about the strong euro
– close to a more than two-year high against the dollar – and said if the shared currency kept rising, that would trigger more monetary easing, to keep inflation from falling too low. That was seen as opening the door a bit wider to looser monetary policy. Benoit Coeure, an ECB executive board member, further oiled the hinges by saying the central bank may also consider using targeted asset-purchases.

Just how low is euro-zone inflation right now? We\’ll know for sure on Wednesday. The final number is unlikely to diverge much from the flash reading — which showed a four-year low — but economists will be looking at the details. They\’ll want to see how much of the downside was due to temporary distortions and how much was genuinely low inflation.

So stay tuned for a week of fretting over deflation, and data that could sway the ECB\’s course at its policy meeting in May.

Euro-zone inflation: The main event in an otherwise quiet data week in Europe. The flash reading showed inflation fell to 0.5% in March — a \”genuine surprise\”, Draghi said. Economists think the final reading will just confirm this level, the lowest since November 2009. And that will give the easing camp more ammunition in their call for a rate cut or quantitative easing at the next central-bank confab.

But don\’t expect that low to hold: Consumer prices in April are forecast to rise much faster, due to the timing of Easter. Draghi may use that as an excuse to delay making a move. April\’s inflation figures come out at the end of the month, and they should be strong enough for the ECB to hold its fire in May, economists at Commerzbank believe.

\”Under our baseline scenario, we assume that the central bank will not ease monetary policy in the months thereafter. Indeed, in subsequent months, inflation is unlikely to fall back to the low March reading, but rather to fluctuate at levels around 0.8%,\” they said in a note.

U.K. inflation: It\’s a different story in Britain. Philip Shaw, chief economist at Investec Securities, expects U.K. consumer prices to have risen 1.5% in March, down from 1.7% in February. That would push inflation further below the Bank of England\’s 2% threshold for possible action. If the numbers come in as expected, the BOE will find it easier to make the argument it should keep interest rates low well into 2015, as too-high inflation won\’t be a problem. The data come out on Tuesday.

U.K. unemployment: If not inflation, maybe the labor market will prick the BOE into a move of some sort. Unemployment data for the three months to February are released on Wednesday, with a drop to 7.1%, from 7.2%, predicted. Some economists are wondering whether joblessness might even reach 7%, the level that would activate the BOE\’s looser, \”fuzzy\” forward guidance, laid out in February.

Under that new guidance framework, unemployment lost its leading role in shaping interest rates, replaced by a wider range of indicators. For example, salary growth is now in the limelight — and Shaw expects earnings to have risen 1.8% in February, up from 1.4% in January.

ZEW sentiment data: German investor confidence will be watched closely on Tuesday, after the ZEW indicator of economic sentiment dropped for a third straight month in March. Another drop is seen for April, with the headline figure forecast to dip as low as 40, from 46.6, according to Commerzbank estimates.

Earnings: The U.S. may be getting up to full speed, but Europe won\’t see the same level of earnings activity just yet. Even so, one name this week is definitely worth mentioning: Tesco
. The U.K. supermarket giant is struggling to keep up with rivals at home, and its market share and stock price are languishing at near-decade lows. The full-year results are out on Wednesday, and analysts expect to see a drop in revenue and trading profit.

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